Thursday, August 30, 2007

On Malaysia’s 50th Birthday

On the occasion of the country’s first half-century of independence, we look at Malaysia’s promises and problems.

On Malaysia’s 50th birthday, problems sown a generation ago continue to nag at the fabric of a nation that is precariously divided along racial lines. Despite decades of economic success, the divisions represented by racial preference in law through the New Economic Policy that favors ethnic Malays, the bumiputras remain, as does an authoritarian ruling structure, despite its nominally parliamentarian framework and antecedents.

The economy, growing at a 5-6 percent clip over the better part of this decade, should continue to improve steadily, with China increasingly replacing the west as a destination for its raw materials exports – particularly the tropical hardwoods that are being smuggled out of Malaysia’s side of Borneo.

But beyond that there are almost as many questions as answers for the country. Its struggle with its identity came to the fore recently when Deputy Prime Minister Najib Tun Razak in July declared that Malaysia was an Islamic nation rather than a secular one, stirring deep concern on the part of its minorities, who make up almost half the population.

Sharia law appears to be creeping out of the northeastern corner of the country it had been boxed into for decades, most recently in the highly publicized case of Lina Joy, a Malay woman who attempted to change her religious affiliation to Roman Catholic and was told the decision would be up to the sharia courts, which only once in the country’s existence have ever allowed anyone to leave Islam. Former Prime Minister Mahathir Mohammad’s stern attention to keeping the country secular does not seem to be matched by the efforts of his weaker successor, Abdullah Ahmad Badawi.

Attracting capital and expertise is increasingly difficult, partly because of China, which seems to be sucking lots of the oxygen out of Southeast Asia even as it presents a lucrative market for exports, and partly because of questions over corruption and the inability to break what amounts to an ethnic Malay business cartel.

The economy could use additional momentum. Despite Mathathir’s attempt to create a high-tech corridor to rival Silicon Valley, Bangalore has stolen a march on Malaysia. Part of the reason for that goes back to the NEP. Malaysia is not educating its citizens equally. Educational privilege is accorded to the bumiputras.

The country, which continues to control the news media through licensing and the fact that all of its major newspapers are owned by its political parties, is also trying to figure out what to do about the Internet, where a proliferating corps of bloggers has grown increasingly vitriolic, and SMS texting, which delivers up often-irresponsible messages about racial confrontations.

Racial Scars

Many of the seeds of Malaysia’s problems were sown when the country was bequeathed its freedom by the British after 148 years of colonial life. To some extent, it is a miracle that it is a country at all, given the fact that the Islamic 60 percent of the population believe it is a sin to eat pork or pet a dog, and the Chinese 25 percent believe they can’t live without pork on the menu (Indians make up the balance). Racial tensions have bubbled up occasionally, particularly in May 1969, when riots resulted in the deaths of as many as 1,000 people, the majority of them Chinese.

The raw scars of that 1969 violence have left Malaysia in thrall to the idea that similar violence could be imminent. In October 1987, racial tension grew to the point where Mahathir cracked down with what was called Operation Lalang, arresting more than 100 persons and revoking the publishing licenses of the Chinese-owned Star and Sin Chew Jit Poh newspapers. Opposition leader Lim Kit Siang and several members of the Democratic Action Party were jailed along with leaders of Parti Sa-Islam, the largest opposition Islamic party, and others. The resulting trauma has kept all sides on their toes and when things start to look like they are about to get out of hand, parties tend to back away.

Beyond that, however, Malaysia is a lucky country. Its wealth of natural resources, starting with tin and rubber, were extended by exploitation of its energy reserves, which today produce 720,000 barrels of oil and condensates a day plus 5.5 billion cubic feet of natural gas. The country’s proven recoverable reserves total 3.0 billion barrels of high quality crude plus 75 trillion cubic feet of natural gas. With the world currently in love with bio-gas, Malaysia, with 4.2 million hectares of oil palm, should be a major beneficiary.

In short, despite a leadership, especially under Mahathir, addicted to massive – and massively expensive projects to demonstrate its developed world ambitions, it is so rich in natural resources that it can’t be looted fast enough to cause the population of 24.8 million citizens to demand change. The Barisan Nasional, the country’s ruling coalition of ethnic parties, has remained in charge since independence. The coalition includes the United Malays National Organisation, the Malaysian Chinese Association, the Malaysian Indian Congress and Gerakan, a Chinese dominated smaller party.

The racial millstone around Malaysia’s neck is a direct consequence of the 1969 riots, which exploded out of ethnic Malay grievances against the wealthier Chinese. It is the New Economic Policy, an affirmative action policy designed to deliver up the ownership of at least some of the means of production to the country’s bumiputras, or sons of the soil. The NEP was designed to “eliminate the identification of race with economic function” by transferring wealth to ethnic Malays.

Although the NEP officially ended in 1990, it was succeeded by a National Development Policy in 1991 that continued many of the same affirmative action policies, supposedly until bumiputras attained a 30 percent share of the country’s wealth.

The Gilded Class

The country is learning the universal lesson that affirmative action programs, once started, are devilishly hard to get rid of. And, as other countries also know, they tend to create a rentier class skimming off contracts and ownership without the benefits trickling down to the poor whose condition created the problem in the first place.

Earlier this year, a report by a prestigious think tank challenged the NEP, saying that ethnic Malay ownership of public corporate equity is far higher than previously believed and above the 30 percent goal that the original program specified. That uncomfortable finding forced the head of the think tank to resign but it did raise questions over how Malaysia will ever wean itself away from the NEP and how much the program has distorted its economy. The NEP has been criticized for creating a cosseted Malay elite while doing nothing for rural Malays. It is also criticized as markedly unfair to ambitious minorities who may be shut out of universities and government jobs.

Still, over the last 35 years the country has undergone an undeniable economic transformation that has largely lifted everybody’s boat. The question is whether the NEP is responsible through the program of giving equity preference to bumiputras in government-linked companies. There are about 40 listed GLCs, as they are known, accounting for as much as 35 percent of the total capitalization of Malaysia’s markets. Petronas, by far Malaysia’s biggest company, is fully government-owned. The government holds a majority of the equity in seven of the top 10 listed companies, with so-called golden shares in Malaysian Airlines, Telekom Malaysia, and Tenaga Nasional, the power utility, among others. By and large, these companies are headed and run by Malays. They have often been run very badly.

There is also the question of so-called Ali Baba companies, so nicknamed because in Malaysia many private enterprises observe an unspoken rule that a Muslim – an “Ali” in local parlance will occupy a top position in the company and that Malays will get a certain number of positions while the “Baba” a nickname for the Chinese – will often form the corporate backbone. Multinationals doing business in Malaysia also know that high-powered Malays must have seats on their boards of directors. That has allowed rent-seeking Malays to take directorships and other posts with companies in exchange for equity – which adds to a false picture of how much equity these sons of the soil really own.

Bumiputra companies also receive the lion’s share of large government contracts. They are guaranteed 30 percent of the initial equity ownership in new market listings and privatizations. Companies involved in privatizations must offer employment to bumiputra individuals and a minimum of 60 percent of government procurement, contract work and other related projects must go to bumiputras.

The real question is whether 30 years of preferential treatment has done much good for rank-and-file ethnic Malays. Many people, Malay, Chinese or Indians complain among themselves that the NEP resulted in a gilded superclass of bumiputra executives who do little but collect their salaries and stock options and let others do the work. Worker-bee bumiputras, some say, remain at the lower end of the economic scale.

There is a long list of economic disasters. The Perwaja Steel scandal cost the treasury some US$800 million, while the Bank Bumiputra scandal of the early 1980s cost US$1 billion. An unsuccessful attempt to corner the tin market cost some US$500 million and the failing Proton national car cost as much as US$2.5 billion plus far more in lost opportunity cost for Malaysia’s consumers. The current scandal over a huge development at Port Klang, in which a troubled port operator may have piled up as much as US$1 billion in debt is the latest bad news.

But it is not all bad news, of course. Under the goad of Mahathir the economy was transformed. Although rubber, palm oil and tin remain important, Mahathir was the driving force behind a new export-led economy, primarily in electronics. The country boasts some of the best infrastructure in Asia and it has remained largely open to foreign investment, capitalizing on the country’s links to the west despite Mahathir’s loudly trumpeted Look East policy of the 1980s.

Tolerable Corruption?

Politically, despite the fact that the Barisan Nasional has been in power for 50 years, rivalries within the coalition and with smaller opposition groups have meant that the country is largely open and relatively parliamentarian. Religious and ethnic differences, despite tension, remain under control despite occasional outbursts, particularly by Malay politicians, to “bathe the country in blood” if Malay dominance is threatened. As the influence of Islam rises and minorities feel increasingly threatened, it remains to be seen if the post-Mahathir leadership will demonstrate his same gumption and put a stop to the ethnic posturing before its get dangerous.

Corruption, far below levels in other Southeast Asian countries, nonetheless remains a problem. In a poll of nearly 1,500 expatriate businessmen by the Hong Kong-based Political and Economic Risk Consultancy (PERC), of 13 countries, Malaysia was ranked seventh. Transparency International’s annual ranking dropped the country five ranks to 44th place in its 2006 Corruption Perceptions Index (CPI) from 39th place last year, according to reports announced in Berlin this week. But 44th is a long way from the bottom. There were 163 countries in the poll.

In all, despite the tensions, Malaysia remains an often inventive country that appears determined to continue its rise. The bill for its racial policies will come due and its increasingly well educated citizens are demanding greater accountability from its courts and openness from the news media. But the report card? Compared to its neighbors, the balancing act has been a success.